Restaurant Law Blog

COVID-19:Understanding force majeure clauses in your lease and other contracts

Wed, 18 Mar 2020 17:45:00 GMT

Force majeure is a contractual provision that excuses a party’s performance if an unforeseeable event prevents them from fulfilling their obligations under the agreement. Not all agreements (especially lease agreements) contain these provisions, but some of them do. Landlords frequently object to the inclusion of these provisions for practical reasons. However, that does not mean that you are without recourse if your agreement lacks such a provision. I’ll discuss that below.

Additionally, it should be noted that force majeure does not entirely excuse a party’s non-performance, rather it suspends performance during the unforeseeable event and for a reasonable time period thereafter.

When it comes to COVID-19, courts will evaluate:

(1) Whether your force majeure clause is intended to include a pandemic. Many clauses are limited to acts of god (e.g. fires, earthquakes, floods), acts of war (inc. terrorism, etc.) and do not include mass illness. It is unclear whether the courts would view “acts of god” to include a pandemic such as COVID-19, although a great argument could be made. Regardless, it’s obviously better if your agreement contains that specific language.

(2) Whether COVID-19 was truly unforeseeable.

(3) Proof that the COVID-19 outbreak was the direct cause behind the city’s decision to close your (and all) restaurants; and lastly

(4) Evidence that the forced closure of your restaurant has resulted in a near complete inability to meet your contractual obligations.

If your agreement lacks a force majeure clause, you may still be entitled to relief under the common law doctrines of “frustration” or “impossibility.” In New York, the doctrine of impossibility applies when a party’s continued performance is objectively impossible due to an act of god, act of war, or force majeure event, so much so that it is fundamentally unjust to hold the parties to their original agreement.

Keep in mind, force majeure is not limited to lease agreements but rather applies to most of the vendor agreements you may have. Think of all of those other agreements that you may have personally guaranteed (e.g. linen, POS, soda dispensing, dish washer, etc.).

Hospitality Update: COVID-19 - NYS Liquor Authority - Delivery of Alcohol

Sun, 15 Mar 2020 14:54:00 GMT

As of this morning, the NYS Liquor Authority is permitting all On-Premises licenses to sell and deliver beer, wine and liquor. This is a significant departure from the prior restriction limiting the sale and delivery to only beer. Additionally, if you are overstocked, you are now permitted to return for a credit any and all alcohol purchased from March 1st.

We know that these are uncertain and overwhelming times for many of our clients but we just wanted to let you know that we remain available to help in any way we can. We are doing our best to try and gather information on resources and options that are available to our clients as clearly this is a new scenario and measures are being enacted on both the city and state level to assist some of the businesses forced to cease normal operations. We will be putting together a newsletter today to address some of these concerns, and provide some helpful resources. In the meantime, please know that we are here to help if you have any questions or concerns.

Our business is nothing without the hospitality industry and we want to help in any way we can. Beginning today and for the next month, we are reducing our fees by 25% for all transactional work.

Is Your Restaurant or Hotel in Compliance with New York’s Spread of Hours Law?

Tue, 22 Oct 2019 16:25:00 GMT

What is the Spread of Hours Law?

Title 12 of the New York Codes, Rules, and Regulations (NYCRR) §142-1.6 is a law that requires employers to pay any employee an extra hour of pay, at the basic minimum hourly rate, for any day on which the employee’s “spread of hours” exceeds 10. The spread of hours is defined as “the length of the interval between the beginning and end of an employee’s workday.” Essentially, if an employee’s “punch in” and “punch out” time exceeds 10 hours on any given day, even if that employee left the restaurant or hotel for a 6-hour lunch and only actually worked 5 hours that day, the employer must pay them for an extra hour. The additional hour of pay “is not payment for time worked or worked performed” and does not need to be included in the regular rate for the purpose of calculating overtime pay.

Is There Anything I Can Do to Prevent Paying the Extra Hour?

To avoid paying “spread of hours” pay, an employer is entitled to set an employee’s work schedule as long as that schedule is set on a regular basis, is consistent with the employer’s normal operations, and is not just arbitrarily set as a way for the employer to circumvent this law.

Who is Covered by the Spread of Hours Law?

The Spread of Hours Law applies to all employees in restaurants and all-year hotels, regardless of the employee’s regular rate of pay.

If you have any questions about whether your hotel or restaurant is in compliance with this Law, please contact DiPasquale & Summers LLP for a consultation.

Choosing a Location for your Restaurant or Bar

Tue, 04 Jun 2019 16:57:00 GMT

CHOOSING A LOCATION FOR YOUR RESTAURANT OR BAR

There are many factors to consider when deciding where to lease space for a restaurant or bar- including the high cost of rent, the size of the space, and the accessibility of the space/location within a busy city. Included in this consideration should be how evaluating any obstacles you might encounter in obtaining your liquor license, including the following:

1. The Community Board.Almost every neighborhood in NYC has a local community board which serves as an advisory group and can wield a lot of power over your bar or restaurant.Currently there are 59 community districts in NYC: twelve in Manhattan, twelve in the Bronx, eighteen in Brooklyn, fourteen in Queens, and three in Staten Island.The Community Boards are typically active in everything from zoning to budgeting and they essentially represent the interest of the residents in their district.The Community Boards can also have a big impact on whether or not your liquor license will be approved and, if so, what stipulations they might require your establishment to adhere to.Community Boards in very saturated neighborhoods, such as the West Village and Lower East Side, tend to be much tougher with their review of liquor license applications and can require you, as a condition for approval, to agree to early closing times, soundproofing, limitations on private events, limitations on the types of music you can play, etc.When applying for a liquor license, prior to submitting your application to the State Liquor Authority, you will often have to complete a Community Board application and appear before the Board to answer questions regarding your proposed establishment, including your prior experience in the industry, your proposed method of operation, your plan for soundproofing and crowd control, etc.If there is opposition from neighbors, who may not want an additional restaurant/bar in the area, perhaps because they are concerned about noise or additional congestion, the Community Board may be even tougher in their review.When deciding on a location you should consider which Community Board you will be applying to, assess how many other licensed locations are in the area, and consider factors such as the hours of operation you may be requesting and whether that Community Board is likely to approve such hours.While the Community Boards often do not have significant authority over beer and wine licenses, they can have a huge impact on your application for a full liquor license, particularly if you are in an area that is subject to the 500 Foot Rule.

2. The 500 Foot Rule.The 500 Foot Rule is another factor that should be considered when choosing a location for your restaurant or bar.Under this Rule, no more than three on-premises liquor licenses will be granted within 500 feet of each other unless the Applicant falls under the public interest exception.This Rule does not apply to beer and wine applications, nor does it apply to any premises that has been continuously licensed since November 1, 1993.When the SLA evaluates whether the license would be in “the public interest” they will consider such factors as the applicant’s history with the SLA, the impact your establishment may have on the community, whether there is community opposition to your application, the number and types of existing businesses in the neighborhood, and whether your establishment will provide the neighborhood with a concept or benefit not currently offered by another business.Applications which trigger the 500 Foot Rule are required to submit a 500 Foot Statement and Questionnaire, detailing why their license would be in the “public interest,” and applicants, particularly in situations where the Community Board has denied the application or where there is community opposition to your establishment, can be required to attend a 500 Foot Hearing at the SLA.

3. The 200 Foot Rule.Another important consideration is the 200 Foot Rule which applies to any establishment where liquor will be sold.Once again, this Rule does not apply to beer and wine applications, however, it does apply to any establishment where liquor or wine will be sold for off-premises consumption.Under the 200 Foot Rule, the SLA will not issue a license to any establishment that is on the same street and within 200 feet of any building that is used exclusively as a school, synagogue, church, or place of worship.There are no exceptions to this Rule and it is important that, if you plan to seek a full liquor license, you insure that your establishment is not subject to this prohibition.When measuring the distance, you would measure from the primary entrance of the school/church and to the primary entrance of your establishment.The Rule is only triggered if your establishment is on the same side of the street as the school/church, however, it does not need to be on the same block.If the school/church is on a corner, the Rule would apply to any establishment on both streets, regardless of where the actual entrance may be.While the law requires that the building be used “exclusively” as a school/church, some use may be considered incidental to its primary use, such as events, social activities, treatment groups, or health classes.

These are just a few of the many considerations that should factor into your decision when choosing a location for your establishment. If you have any questions about whether a particular location could present obstacles for obtaining a liquor license, please call DiPasquale & Summers LLP for a consultation.

Announcement & Special Offer

Mon, 15 Jan 2018 12:36:00 GMT

Dear Clients, Colleagues and Friends:

I have the great pleasure of announcing that as of January 1, 2018, the DiPasquale Law Group has joined with Kimberly A. Summers of Summers and Schneider, P.C. This newly formed hospitality law firm, DiPasquale & Summers, LLP, will be a true combination of equals, bringing together attorneys recognized for their corporate and regulatory expertise, as well as their sophisticated litigation and transactional practices.

The practice will remain dedicated to providing full service support and advice to business and restaurant owners in every stage of the hospitality industry. Together, we believe that we can provide even greater service and assistance to our valued clients. We remain committed to offering the highest quality legal advice and advocacy and look forward to continuing this work over the coming years.

We will continue to operate from our current offices. All the contact information for us will remain the same except our e-mail addresses will change. The convention for those addresses is [first name]@ds-lawoffices.com. We enjoy helping our clients build their business and are grateful for your loyalty and friendship, which have enriched our relationship. Kim and I are confident that our new affiliation will serve us all well.

I look forward to introducing you to Kim and as a way of providing such introduction, we have agreed to extend a special offer to our clients, colleagues and friends, to help them better prepare for the future.

Over the next few months, we would like to help you plan for life’s unknown eventualities by helping you draft a Last Will and Testament, Power of Attorney, Advanced Medical Directives and Living Will. Our typical flat fee ranges from $1,500 - $3,500 for this service, but we would like to offer it to you for $500 ($750 if you would like to include a spouse) to say thank you for your continued loyalty.

If you have any questions about this exciting news and what it will mean for you, please contact either of us at any time.

James D. DiPasquale, Esq.
DIPASQUALE & SUMMERS, LLP
555 5th Avenue - 14th Floor
New York, New York 10017
(t) (646) 383-4607
(f): (646) 606-2388
www.restaurantlawny.com

Crowdfunding; Multiple Investors and Commercial Real Estate Lease Issues

Mon, 15 Jan 2018 08:55:00 GMT

The concept of investing using an internet crowdfunding model is a fairly recent development and commercial leases often are behind the curve. A business owner planning to raise capital through an online equity crowdfunding platform would be prudent to pay close attention to restrictions that are often contained in the assignment provision of its commercial lease agreement. Generally, clauses governing a tenant’s right to assign or sublet are some of the most detailed, complex and extensively negotiated provisions of a commercial lease, partly due to the fact that a tenant’s covenant that it will not assign its lease cannot be implied. Landlords who want to maintain control over the identity of their commercial tenant, are therefore expected to include within the lease explicit language restricting those types of transfers which cannot be performed without first obtaining landlord’s written consent. Additionally, because New York courts disfavor assignment prohibitions, viewing them as a restraint on alienation, clauses intended to restrict lease transfers must be clear and precise in order to pass judicial scrutiny.

Most landlords employ an evaluation process to vet prospective hospitality tenants, and this process includes rigorous screening of each prospective tenant’s financials, credit and rental history, experience, food and beverage concept, as well as other intangibles such as business acumen, management style, and industry reputation. Landlords are justifiably cautious when it comes to selecting who will occupy their space and, therefore draft commercial leases to expressly prohibit, or limit, a tenant’s ability to assign its lease to an unknown third-party without landlord’s blessing. The most common transfer restrictions are those that address direct assignments (i.e. the transfer of a lease from one tenant to another). Less common, but no less impactful, are transfer restrictions which regulate indirect assignments. In this Section, we limit our discussion to indirect assignments resulting from the sale and issuance of stock and the admission of new shareholders into a corporation which, is already bound by a commercial lease. It is in this scenario that equity granted through crowdfunding campaign proves to be the most problematic.

The lack of sufficient capital is a major reason why many restaurants fail. All too often inexperienced restauranteurs underestimate the capital requirements of their intended business, while others start with nothing more than a nickel and a shoestring but have no actionable game plan outlining how additional capital will be secured when necessary. A recurrent byproduct of this head-in-the-sand approach is the failure to properly review and negotiate critical lease terms such as the circumstances under which a future change in the tenant entity’s stockholdings will require landlord’s approval.

Many landlords believe that a change in corporate holdings, or control of a commercial tenant, should be regulated as though it were an assignment. If not regulated, a tenant could effectively achieve the parallel of a lease assignment (and skirt the limitations thereof) through a successful reorganization that shifts the governing authority of a tenant, and by extension the premises, to an unvetted third-party. Notably, in the context of commercial leasing, a shareholder in a tenant entity has an absolute right to sell his or her interest to a third-party and a corporate tenant has the absolute right to issue additional shares in the corporation to existing or new shareholders in the absence of lease language explicitly requiring landlord’s consent to any proposed change of control or stockholding. As such, most commercial leases contain some form of limitation over a tenant’s ability to alter its corporate structure or stockholdings. The justification for this is that publicly traded corporations lack the ability to control the purchase and exchange of its shares which are freely traded on the open market. The consequences of proceeding without such an exemption could prove not only difficult for the imprudent public corporation that executes a commercial lease under these circumstances, but also a reasonably foreseeable fiscal and legal catastrophe for both parties to the lease. In this regard, attorneys representing a pass-through entity which is wholly owned by a publicly traded company, or a pass-through entity that intends to go public, or sell its business to a public company, in the relatively near future, would be wise to insist on the inclusion of a similar exception.

Similar to the manner in which direct assignments are handled, indirect assignments often require landlord’s prior written consent to any corporate reorganization or amalgamation with another entity, often irrespective of affiliation. While it is common to see indirect assignment restrictions contained in your standard hospitality lease, the wording of such restrictions can vary appreciably. Many commercial leases contain over simplified language intended to limit, but necessarily define, changes of control occurring with respect to the tenant entity itself, while others contain exhaustive language defining ‘control’, and describing in exacting detail what constitutes a ‘change of control.’ Still others require that any change in stock holdings, regardless of its corresponding ownership percentage or whether it comes with any voting rights, be pre-approved by the landlord.

Astute tenants aim to preserve their assignment rights, both to ensure that necessary capital raises and reorganizations can be undertaken, but also as a general exit strategy should the tenant elect to sell its business or business assets. A well-crafted and equitable indirect assignment provision will balance the parties’ competing interests, but the norm, at-least in New York City, is that most indirect assignment provisions favor the landlord. A typical transfer restriction might read:

For the purposes of this Article, a transfer of 51 percent or more of the beneficial interest in Tenant, at one time or in a series of transactions, and whether of the issued and outstanding capital stock, partnership interest, or otherwise, shall be deemed to be an assignment of this Lease.

A less favorable (albeit common) transfer restriction, might read:

If Tenant is a corporation or limited liability company, any dissolution, merger, consolidation or reorganization of Tenant, or any sale, assignment transfer, pledge, encumbrance or other disposition of any of the corporate stock or membership interest of Tenant, or, if Tenant is a partnership, any sale, assignment, transfer, pledge, encumbrance or other disposition of any interest in such partnership, shall constitute an assignment of this Lease. With respect to any assignment of this Lease to an assignee, Tenant, all of Tenant’s principals at the time of the assignment and any guarantor(s) of Tenant’s obligations hereunder shall remain jointly and severally liable (as primary obligor) with the assignee, and with any and all subsequent assignees, for the performance of Tenant’s obligations under this Lease during the balance of the Term, and, without limiting the generality of the foregoing, they shall remain fully and directly responsible and liable, jointly and severally, to Landlord for all acts and omissions on the part of any assignee subsequent to Tenant for a breach or violation of any of the obligations of this Lease.

The latter provision is noticeably more restrictive since all transfers, regardless of scope and size, are deemed to be an assignment of the lease, while the former provision at-least exempts those transactions in which less than 51 percent of the tenant entity changes hands. Arguably, the second provision should be viewed as more tenant friendly, but that does not necessarily mean it is equitable.

The actuality of how many small hospitality businesses operate is frequently ignored in the game of tug of war that occurs when a landlord and tenant negotiate a commercial lease. As previously mentioned, it is not uncommon for a lease to inadvertently omit a provision defining “control”, leaving the parties to argue that their respective interpretation should be incorporated into the lease. Within the hospitality industry, many closely-held corporations are exclusively managed and controlled by a minority class of shareholders, and others, by a board of directors and appointed officers. The degree of control vested in any particular shareholder, class of shareholders, board member or officer, is dictated by state regulation and through the by-laws of each corporation, and where applicable, the shareholders agreement. It is common to see control defined as the ownership of the majority of a corporation’s shares, but it is equally common to see it defined by the right to cast a majority of the votes of a tenant’s entity, or a right exclusively vested in the board of directors, authorizing it alone, to control and manage a tenant entity and its day-to-day business affairs, notwithstanding the majority ownership of all issued and outstanding shares. Stated simply, when it comes to the governance and operation of a corporation (or an LLC or partnership for that matter), control and majority ownership, are not always synonymous. Consequently, boilerplate provisions designed to restrict indirect transfers often have the unintentional effect of limiting a company’s ability to secure additional capital or strategically reorganize, should the need or desire arise. This is where crowdfunding becomes difficult.

In many ways similar to a public corporation, small, closely held companies engaged in a crowdfunding campaign are, relatively speaking, unable to regulate the persons who might acquire an equity interest in their business. While a landlord may agree to not unreasonably withhold its consent to the admission of new shareholders or the transfer of shares among existing shareholders, the mere act of seeking landlord’s approval of potentially hundreds of small, crowd-sourced investors is impractical, especially given that most lease agreements require tenant to either pay landlord a fee to review the proposed transfer, or at-minimum, cover landlord’s expenses which are connected to their review of the proposed assignment.

Furthermore, depending on the sophistication of the landlord and the equity being granted, irrespective of voting rights, most tenants should expect some level of required disclosure for each new shareholder, meaning that the logistics of obtaining necessary material for a landlords’ consideration, could be a daunting task in and of itself, particularly if certified financials are being requested.

While it is unlikely that most landlords would stand in the way of a corporate reorganization where only a small percentage of equity is issued to a pool of crowd-sourced investors, the likelihood for complication nonetheless exists and becomes exponentially greater as the equity offering increases.

Crowdfunding; Multiple Investors and New York State Liquor Authority Disclosure Issues

Sun, 14 Jan 2018 08:45:00 GMT

Crowdfunding is becoming an increasingly popular way for business owners to gain the financial backing they need to turn their concepts into realities. In recent years, websites like kickstarter.com have helped thousands of entrepreneurs obtain access to the funds they needed to get their projects off the ground. With the internet age upon us, the ability to reach people, and beg them for a few dollars, is easier than ever. However, would-be restaurateurs have not been as successful as other small business owners seeking financial backing in these arenas. Unlike other business owners, restaurant owners often need significant sums of money to open their doors. A donation of $10 in exchange for a coupon or a tee-shirt is not typically going to raise the amount of capital needed for a restaurant. But what if you, as a restaurant owner, could solicit true investors in exchange for a piece of your company?

Unfortunately for the hospitality industry, the regulations imposed by the New York State Liquor Authority (“NYSLA”), as codified in the Alcoholic Beverage Control Law (“ABC”), unintentionally limit the effectiveness and usefulness of crowdfunding. The recent approval by the SEC of new equity crowdfunding regulations, does not, unfortunately, relieve an owner from any statutory regulations or requirements pertaining its business. One such regulation is Section 111 of the ABC, which prohibits a licensed establishment, or principal thereof, from making its license available to a person who has not been approved by the NYSLA. Certain individuals are statutorily disqualified from holding a license, including those persons who: (a) are under the age of 21; (b) are not a U.S. citizen or alien admitted to the U.S. for permanent lawful residence; (c) have been convicted of any felony, or promoting or permitting prostitution, or the sale of liquor without an alcoholic beverage license; (d) are police officers or police officials; (e) have had an alcoholic beverage license revoked; or (f) presently hold a wholesale license. As a result of these limitations, there should be a clear process to eliminating these disqualified individuals from the target investment pool prior to launching a crowdfunding campaign.

Once funding has been procured, applicants, typically companies, are required to disclose the names, ages, citizenship and permanent home addresses for each and every one of its directors, officers and shareholders (or in the case of an LLC, its managing members and members) as part of the application process. However, if a company has more than 10 members or shareholders, then only those members or shareholders owning 10 percent or more of any class of stock or membership interest must be disclosed. This exception is unfortunately limited because applicants must still disclose all persons who “directly or indirectly have an economic interest in the applicant’s business by way of investment, loan or other financial arrangement.” In other words, any person who has given money to the applicant must be disclosed regardless of their ownership percentage.

For illustration purposes, assume that Tom is gifted a 5 percent membership interest in XYZ, LLC and that this LLC has 20 members. Under this scenario, assuming that Tom is not statutorily disqualified from holding a license, and further assuming that he is neither an officer nor managing member of the company, there is no requirement that his interest be disclosed. Likewise, in those limited circumstances where equity is not involved (such as in campaigns promoted on www.pieshell.com or www.inkind.com), crowdfunding can be a useful tool in raising small amounts of capital regardless of whether an alcoholic beverage license is sought. The flaw in this example is that people rarely are given a membership interest for no consideration. Instead, a more realistic example would be to assume that Tom acquired his membership interest by investing in the company or through some other financial transaction. Now, despite the fact that Tom owns less than 10% of the company, his interest must be disclosed because of his personal investment. It is this caveat - the equity investment - that complicates crowdfunding since it necessitates the disclosure of each participant, regardless of the size of his or her investment.

There are many appealing considerations when it comes to equity crowdfunding, particularly since many would-be restaurateurs do not have ample ‘connections’ to generate the investment needed to open an operate their business or because they may be unwilling to grant any single person, or group of individuals, a significant stake or voice in their business. Crowdfunding addresses these concerns by widely publicizing investment opportunities to a vast group of individuals, each of whom are given a chance to invest on a much smaller scale, and on terms generally considered more favorable for the company than your standard venture capital deal. One obvious downside, however, becomes the requirement of having to disclose hundreds of investors to the NYSLA.

So, how does an applicant disclose its investors? While the process is not overly complex, it is far from simple. The NYSLA requires that each investor complete a personal questionnaire detailing the following: name; date of birth; social security number; address; phone number; email address; citizenship; height; weight; hair color; eye color; sex; marital status; spouse name and social security number;, position in the company; percentage ownership; five-year residential history; five-year employment history; whether they will take an active part in the business; liquor license history and affiliations (New York State and beyond) to identify any interlocking interests; criminal history; and any applicable statutory disqualification. Additionally, each investor must provide proof of citizenship or alien status, a copy of their driver’s license or passport, a headshot photograph, submit to fingerprinting, and provide bank statements (typically 3 months) or other financial documentation showing the source of their investment. If the investment source is a personal bank account, then any deposit over $10,000 needs to be explained. A common scenario involves an individual who invests a sum of money (e.g. $15,000) and upon review of their bank records it is discovered that the source of his or her investment was a gift or transfer from a family member. In that situation the family member who gifted the funds would also need to complete a personal questionnaire and produce their bank records to show the source of the transferred funds.

Further complicating matters, if an investment source is a joint bank account (e.g. husband and wife), the non-investing spouse must also complete a personal questionnaire. As you might imagine, with potentially hundreds of investors, the disclosure process can become complex and onerous. The logistics of reviewing all of the required documents for each investor, as well as spouses, family members, etc., to ensure accuracy, compliance and an absence of tied house violations, can be cumbersome, particularly when you routinely have to communicate with each person to address identified deficiencies, ensure receipt of signed questionnaires, and confirm that everyone has been timely fingerprinted.

Personal questionnaires and accompanying applicant statements must then be signed by the investors and originals must be filed with the NYSLA as part of the company’s application. Once the application has been filed with the NYSLA, it will be reviewed and, where applicable, a deficiency letter will be issued to outline any aspect of the application that necessitates further documentation, support or clarity. Barring an extension, responses to a deficiency letter are required within 10 days from the date of the deficiency letter, meaning that an applicant may be required to address several investor deficiencies within a limited period of time. Language barriers, time zones, schedules (work, family, vacation) and other availability concerns pose real problems affecting an applicant’s ability to timely respond.

Assuming that an applicant is able to organize all its crowdfunding investors and coordinate the required filings, there remains a very real potential that one or more investors will, unwittingly, invest in more than one licensed business among the three tiers (e.g. bar and vineyard) in violation of tied-house restrictions. In such a scenario, regardless of the investor’s ultimate ownership (even if it were a nominal one), both businesses would be at risk of losing their license, or, if the businesses were still in the application stage, their application would likely be denied. At the present time, there are no online crowd-funding platforms that have a mechanism to identify and eliminate potential investors who hold an interlocking interest and ultimately the licensee bears the responsibility to insure that all crowd-sourced shareholders have properly disclosed their interests.

Even after the issuance of a license there are continuing disclosure obligations. The NYSLA requires license holders to apply for permission to make any corporate change involving: (1) and change of officers or directors, shareholders, members, etc.; (2) any change in ownership where there are fewer than 10 stockholders or LLC members; or (3) any change involving 10 percent or more of the ownership or any change which would increase a shareholder or LLC member’s ownership to 10 percent or more in companies where there are 10 or more stockholders or LLC members. Further, tied house restrictions are ongoing, so a licensed entity must be vigilant in educating its shareholders of the restrictions surrounding interlocking interests so that no after-the-fact investment is made in a business that might trigger a violation at some future point in time.

The new SEC rules on crowdfunding provide an intriguing opportunity for hospitality businesses to procure the illusive funding which is so often needed during their various stages of development and operation. This opportunity, while exciting, is not without risk or struggle, and attorneys counseling hospitality clients looking to source funding through an equity crowdfunding campaign should become knowledgeable of state and federal regulations which might otherwise complicate a simple capital raise.

Why Lawyers Kill Commercial Real Estate Deals and How to Spot a Bad Deal in Advance

Tue, 07 Feb 2017 10:57:00 GMT

Free Seminar: Why Lawyers Kill Commercial Real Estate Deals and How to Spot a Bad Deal in Advance
When: Wednesday, March 15, 2017 from 5:30pm – 7:00pm
Where: NYC Small Business Solutions, 110 William Street, New York, NY (7th Floor Boardroom)
Seminar Description: Are you tired of spending countless hours showing a property and negotiating a deal, only to have lawyers get involved and kill the transaction? How can this be avoided? This seminar is designed to assist commercial real estate brokers identify problematic deal terms before their time is wasted. The seminar will focus on:

Is your ‘non-binding’ letter of intent actually binding?
How to properly structure a letter of intent for various transactions (e.g. sale, lease, investment)
Identifying hidden lease expenses (i.e. everything that makes up “Additional Rent”)
Understanding real estate taxes and how they are calculated
What debts are transferrable to Buyers in commercial sale transactions (e.g. asset v. stock sales)
Satisfaction of unpaid rent, and why that isn’t always possible
Why unpaid sales tax is such a problem and can result in a broker not getting his commission
Release of guarantors
How to spot an unreasonable landlord and unscrupulous sellers
Spotting certificate of occupancy and zoning issues
Why detailed asset lists are important
Understanding the frequently misunderstood “Good Guy Guaranty”
Demolition and early termination clauses
Assignment rights and why this lease term is frequently the most dangerous
Landlord key money deals – Are they legal?
Understanding the liquor license transfer process in NY
Helpful resources that expedite your review process

How to Sign Up: Click HERE to register directly with NYC Small Business Solutions, or cut and paste the following link into your web browser: https://www.eventbrite.com/e/why-lawyers-kill-commercial-real-estate-deals-and-how-to-spot-a-bad-deal-in-advance-lower-manhattan-tickets-30563685807

Presented by:

James D. DiPasquale, Esq.
DIPASQUALE LAW GROUP
555 5th Avenue - 14th Floor
New York, New York 10017
Tel: (646) 383-4607
Fax: (646) 606-2388
Email: james@dlgnyc.com
www.restaurantlawny.com

You may be the owner of an illegal and accidental franchise and not even know it.

Wed, 17 Aug 2016 14:37:00 GMT

Beware: If you own more than one restaurant which operates under the same name, you may have created an illegal and unintended franchise.

This sounds crazy, but it is actually very common and the consequences of creating an unintended franchise are substantial, serious, and include the possibility of both personal and criminal liability. Many well-intentioned operators have tried to avoid the franchise tag by referring to their business relationships and partnerships as a “license,” or a “capital investment,” but the label placed on a relationship has little bearing on whether or not the relationship constitutes a franchise.

Would the same operators have pursued a different path if they had known that their mistake could result in the rescission of every one of their business transactions and the filing of criminal charges against them? It is a felony to sell a franchise without complying with both State and Federal law, and the respective agencies have the power to shut down your restaurants, freeze your bank accounts, order restitution, prevent an operator from opening new locations, impose huge penalties, award attorney’ fees to all injured parties, and rescind every one of the offender’s agreements under claim of fraud. And, to top it off, claiming that they relied on the advice of their attorney will not help since franchise statutes impose strict liability, meaning that an owner’s intent or knowledge of the law (or lack thereof) is irrelevant.

We all know what a franchise is when we see one, right? McDonalds, Dunkin Donuts, etc. But, did you know that countless other unsuspecting business relationships are actually franchises because the definition of a “franchise” is extremely broad, especially in New York. The New York Franchise Act is unquestionably the nation's harshest franchise law, because its definition of a franchise (discussed below) is so all-encompassing that it borders on absurd.

So what exactly is a franchise?

First, there is no uniform definition of a franchise. As consumer protection statutes, franchise laws are given a sweeping scope by courts, and their subjective interpretations of these broad laws have left operators without a bright line rule upon which they can structure their business relationships. On the Federal level, franchises are governed by the Federal Trade Commission, which defines a franchise as having three elements:

1. Trademark. The grant of a right to open a business operating under (or selling goods or services in connection with) another’s trademark. Any trademark license agreement, by its very nature, meets this first element of the test since there is a trademark licensed by one party to the other. The authority to associate with another’s trademark in offering, selling, or distributing goods or services is not only a common element of every franchise definition, but also the easiest element to meet. Absent an express prohibition against use of a licensor’s trademark, a right to use the mark will be inferred even if the mark is never used.

2. Significant Control or Assistance. The trademark owner has significant control of, or provides significant assistance to a licensee. Many states refer to this element as a marketing plan, where the trademark owner governs how the trademark is to be utilized, advertised, etc. Training programs, recipes, employment and operating manuals, sales assistance, all satisfy the significant assistance aspect of this element. Significant control exists where a licensor approves or restricts the business location or sales territory, specifies design or appearance requirements, prescribes operating hours, establishes production methods or standards, restricts what a franchisee may serve, mandates personnel policies or practices, or dictates mandatory accounting practices. Under certain circumstances, any one of these factors may be enough to constitute significant control or assistance. Significant promises of assistance, even if unfulfilled, will satisfy this element.

3. Required Payment or Franchise Fee. The requirement that a minimum fee be paid (typically within six months). What qualifies as a fee not only includes the obvious license fees, royalties, training fees, and a percentage of gross sales, but arguably also includes the capital investment made by a business partner into a joint venture, and the profit the franchisor takes from the restaurant in the first six months. One notable exception to the Franchise Fee are those costs paid to a trademark owner for goods purchased at a bona fide wholesale price. This would arguably include a licensor’s purchase of, and resale of food and beverage to a licensee at an increased (but not unreasonable) cost.

If all three elements are present, then the relationship is a franchise according to the FTC, meaning that before you can even meet face to face with a prospective purchaser or joint venture partner to discuss the details of the arrangement, you must provide a detailed and exhaustive Franchise Disclosure Document, and if you are in a state with registration requirements (such as New York) you are required to register your FDD with the state before you can approach any prospective buyers or partners.

Trying to determine whether a relationship is a franchise is made more difficult by the fact that, as mentioned earlier, the definition of a franchise is not uniform in all jurisdictions. Some franchise laws substitute a "community of interest" test for the "significant assistance" test. Others refer to the provision of a "marketing plan." Thus, whenever there is a trademark, the exchange of money, and a continuing relationship, you must proceed with caution.

It does not matter what label the parties put on a transaction or agreement: license, joint venture, consulting and supply agreement, dealership; if an arrangement has all of the elements of a franchise, it's a franchise. Scores of articles have been written about the dangers of becoming an accidental franchise. Those dangers are real, as many have learned when they face an unexpected regulatory enforcement investigation, or a lawsuit by a terminated licensee claiming the protection of franchise laws, or a major glitch in the sale of a company when the buyer's due diligence uncovers a possible unregistered franchise program. Now, before you tell yourself that these elements don’t apply to any of your relationships, read further.

In New York, the same basic definition exists but where the Federal Government (and indeed every other state) requires the existence of all three of the above elements, New York requires only two - either the name or the marketing system, combined with the fee. This broadened definition of the term "franchise" thus covers many types of licenses and other commercial relationships not previously concerned with franchise regulation.

So, how do you contract around this? It is difficult to say the least. Structural solutions may save some relationships from the reach of franchise laws but often come at the price of sacrificing essential economic objectives or competitive opportunities. Some people attempt to avoid franchise regulations by not registering their trademark, but this is not necessarily a good idea, not only because you lose the protections associated with your developing brand identity, but in many states (New York included) the use of a registered trademark is not required, a logo or trade name will suffice. Furthermore, restricting your mark’s usage limits the development of a common brand identity placing your company at a significant long-term disadvantage with your franchisor brethren.

Others attempt to avoid franchising through a “no control and no assistance” option, but that too presents several complications, not least of which is the Federal Lanham Act, which imposes an affirmative duty on licensors to control the quality and uniformity of goods and services associated with their registered trademarks. Failure to do so may result in abandonment of trademark rights. Secondly, determining whether significant control or assistance, or a prescribed marketing plan exists is inherently subjective and, consequently, difficult to dodge in a written agreement.

The most common option to avoid franchise regulations is to avoid the payment of a fee. Under Federal law, a franchise relationship can be avoided by deferring required payments over $500 for at least six months after the licensee begins operations. This is true even where a licensee signs a nonnegotiable, secured promissory note (with no acceleration clause) promising to pay the licensor $500 or more after six months. While this exemption offers interesting structuring opportunities for franchises sold in states without franchise laws, it has no counterpart in most states with franchise laws, including New York.

The most common type of “no fee” option is a joint venture, but that is insanely difficult in New York because there is no time restriction on the payment of fees, and as stated earlier, the trademark owner’s receipt of any profit constitutes a fee. While there are limited exceptions to what constitutes a fee, most are difficult to work with, and often frustrate the purpose of what you are trying to accomplish

In short, while structuring a license agreement in the restaurant world is feasible, it is extremely complex and often defeats the intention of a developing business. Countless inadvertent franchises exist in New York and across the nation which have never been caught, but the risks are so significant that due consideration should be given before you enter into any new business relationship.

Free Seminars: Legal Considerations when opening a bar or restaurant. Restaurant Management Boot Camp 2.0

Thu, 11 Aug 2016 10:53:00 GMT

When:

Downtown Location: September 13, 2016 from 5:30 p.m. to 8:30 p.m.
Uptown Location: September 28, 2016 from 5:30 p.m. to 7:30 p.m.

Where:

Downtown Location: 79 John St., 2nd Fl, New York, NY 10038
Uptown Location: 361 West 125th St., 2nd Fl, New York, NY 10027

Seminar Description: An insider look at tips, tricks, and best practices to start your first restaurant in NYC, presented by Restaurant Attorney James D. DiPasquale. To start and run a successful restaurant you must understand many different legal considerations which make operating in New York City, particularly unique. Whether you are a new or existing restaurant owner, this special follow-up to the Restaurant Management Boot Camp class will help you gain a deeper understanding of all of the basic requirements to get your business up and running.

-Forming a Corporation or Limited Liability Company (pros/cons of each)

-Partnership Considerations (The legalities of dealing with your business partners and investors)

-Finding your restaurant space (Buying an existing restaurant vs. straight lease)

-Negotiating your Restaurant’s lease

-Applying for a Liquor License

-General discussion on permits needed (food service/cabaret/sidewalk café, etc.)

To Register:

For the Downtown seminar: click HERE or paste the following link into your web browser: https://www.eventbrite.com/e/restaurant-management-bootcamp-20-lower-manhattan-91316-registration-27080444338

For the Uptown seminar, click HERE or paste the following link into your web browser: https://www.eventbrite.com/e/restaurant-management-bootcamp-20-upper-manhattan-92816-registration-26354368626?aff=ebapi